The naira is expected to lose around a third of its value as market trading began yesterday, which will end the central bank’s fixed exchange rate system.
Foreign investors and economists have called for months, for a devaluation of the naira as chronic foreign currency shortages choked economic growth and led to widespread capital flight.
The central bank said last week that it would abandon the fixed rate in a “managed float”; Nigeria’s commercial banks will set the first exchange rate of the naira versus the dollar when the new market opens.
The naira has been fixed at 197 to the U.S. dollar for the past 16 months but the currency trades at around 350 on the parallel market as a slump in oil revenues has knocked public finances and foreign currency reserves.
Consequently, banks have asked customers to submit bids in recent days, in a sign trading that will be market-driven and not simply dominated by speculative interbank dealing.
So far, Nigeria faces its worst crisis in decades after the decline in oil prices since 2014 and last year’s introduction of a currency ‘peg’ and is likely to go into a recession if the economy does not pull through by Q2.
Analysts deduce that with a likely sharp fall for the naira, Nigerian products will become relatively cheap and imports more expensive, which should stimulate the domestic economy and lift inflation.